Production Possibilities Curve
• *Remember what a trade-off is: it is when you
give up something to have something else
• Economist use the Production
Possibilities Curve model to
show the trade-offs necessary
in any economy
▫ The purpose is to improve
our understanding of tradeoffs by considering a
simplified economy that
produces only two goods
• There is a crucial distinction
between points inside or on the
PPC and points outside the PPC.
▫ If a point is inside the curve it
shows that something is
feasible or possible
▫ If a point is outside of the
curve it shows that something
is not feasible or possible.
• The PPC also shows both the
extreme trade-offs as well as
less extreme trade-offs
• The PPC is also useful for
illustrating the general
economic concept of efficiency
▫ An economy is efficient if
there are no missed
opportunities or if there is a
way to make some people
better off without making
other people worse off.
• If an economy is producing at a point on its
production possibilities curve- the economy is
efficient in production
*Remember: to be inefficient means you are
missing the opportunity to produce more of both
• Another example of
inefficiency in production
occurs when people in an
economy are involuntarily
unemployed.
▫ When this occurs an economy
is not efficient in production
because it could produce
more output if those people
were employed
▫ The PPC shows the
amount that can
possibly be produced if
those people were
employed
 Another way to say this
is changes in
unemployment move
the economy closer to,
or further away from
the PPC
 The curve is
determined by what
would be possible if
there was full
employment in the
economy.
• It is important to remember that efficiency in
production is only part of what’s required for an
economy to be efficient.
▫ Efficiency also requires that an economy allocate
its resources so that consumers are as well off as
possible.
 If an economy does this we say that it is efficient in
allocation
• Efficiency for the economy as a whole requires
both efficiency in production and efficiency in
allocation.
REMEMBER: What is opportunity costs?
3. Types of Opportunity Costs
1. As unchanging or zero opportunity cost
▫ If the opportunity cost does not change when a
unit is added it is reflected in a vertical axis and
horizontal axis.
2. As a constant opportunity cost
▫ If as you move down the slope and it has a
constant slope it is implying a constant
opportunity cost. (12 to 10= -2, 10 to 8 = -2, etc)
3. Increasing opportunity cost
a. It is reflected in a bowed out slope